Latin America

Economic Snapshot for Latin America

July 15, 2014

Germany became the first European country ever to win a World Cup held in Latin America this month, exceeding most expectations. As in the World Cup, where some Latin American countries performed well, reaching the semi-finals and finals, yet others fell far shy of expectations, economic performance in the region also varied this month. The 2014 growth outlook deteriorated again as analysts surveyed by LatinFocus cut the region's GDP growth forecast from the 2.0% that was expected last month to 1.8%. This marks the 15th consecutive downgrade to the forecast and, if 2014’s result turns out to be in-line with the current projection, it will represent the slowest pace of growth since 2009. July's downgrade stemmed from lower growth prospects for 6 of the 11 economies surveyed, including Brazil and Chile. Panelists left their growth prospects unchanged for 2 economies, while they raised them for the remaining 3 countries. Economists are less optimistic about the prospects for 2015 as well and reduced the regional GDP growth forecast by 0.1 percentage points over last month to 2.8%.

Data in Latin America were mixed in the second quarter. GDP growth in all economies in the region decelerated in the first quarter, aside from Colombia and Mexico. Moreover, although the region is still enjoying more benign global liquidity conditions, the outlook remains vulnerable to the uncertain path the United States' monetary policy stance will take as well as China's weakening economic prospects. In the United States, revised data showed that GDP contracted 2.9% quarter-on-quarter SAAR in Q1, which was significantly lower than the 1.0% decline previously reported and thus marked the weakest result in five years. Nevertheless, recent data related to the labor market suggest that the economy is now in a better state. Meanwhile, in China, economic activity stabilized recently and the latest economic indicators show signs of improvement. The manufacturing PMI reached its highest point in six months in June.

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Economic growth in Brazil was weak at the outset of the second quarter; economic activity increased a timid 0.1% over the previous month in seasonally-adjusted terms in April. The result came in just a tad above the flat reading registered in March. In addition, data related to industrial production confirmed that slack persisted in May: industrial output contracted a seasonally-adjusted 0.6% over the previous month, which represented the third contraction in a row. Moreover, the deterioration in consumer and business confidence continued in June, hinting at a further deterioration in economic activity in the short term. Against this backdrop, LatinFocus Consensus Forecast panelists shaved off 0.3 percentage points from last month's estimate and they now expect Brazil's economy to expand 1.2%. For next year, panelists are also more pessimistic and lowered their GDP growth forecast from the 1.8% expected last month to 1.6%. 

Parties have chosen their candidates for the political campaigns that kicked off in Brazil in July. As expected, the Workers’ Party (PT) confirmed Dilma Rouseff as its candidate for reelection. The Brazilian Social Democracy Party (PSDB) confirmed that Aecio Neves will be the party’s candidate, while the Socialist Party (PSB) chose Eduardo Campos. Eight more candidates are also in the race. According to recent polls, Rouseff is the frontrunner with nearly 40% of the voting intention, followed by PSDB’s Neves. Polls indicate an easy win for Rouseff in the first round and that a victory would more difficult in a run-off election.
 
In Mexico, recent data suggest that economic growth likely picked up in the second quarter after the economy experienced a soft patch at the outset of the year, which was likely due to the stronger-than-expected contraction in the U.S. economy. In April, economic activity increased 0.5% in year-on-year terms. This followed the 3.2% expansion in the previous month. Although April’s result represented a deceleration in annual terms, sequential data suggest that seasonal factors affected the result. Adjusted for seasonality, economic activity expanded a strong 1.2% over the previous month in April, which contrasted the 0.6% decrease tallied in March. Leading indicators, however, sent mixed signals for the months to come. Mexican consumers were more optimistic in June, with the consumer confidence indicator reaching the highest level in eight months. Conversely, the manufacturing PMI surprisingly fell in June to 50.3 (May: 52.6), which indicates slower growth in manufacturing production. Panelists remain cautiously optimistic about the economic prospects for Mexico. This month, LatinFocus panelists left their economic growth prospects unchanged for both 2014 and 2015 at 2.7% and 3.9%, respectively. 
 
The Mexican Congress approved the by-laws of the telecommunications reform in an extraordinary session in July. This followed the approval of the political-electoral reform, which was the precondition opposition parties required be met in order to continue debating the by-laws of the telecommunications and energy reforms (see details on page 21). 
  
Newly-released data from Argentina’s statistical institute (INDEC) showed that the economy contracted 0.2% annually in Q1. The print contrasted the 1.4% expansion recorded in Q4 and marked the first decrease since Q2 2012. However, sequential data showed the Argentine economy fell into technical recession in Q1, as GDP contracted a seasonally-adjusted 0.8% over the previous quarter. The reading followed the 0.5% decrease registered in Q4 2013. In addition, further data point to continuing deterioration. In April, economic activity fell 0.5% over the same month last year, which followed the 0.9% contraction recorded in March.  

The legal battle between Argentina and the U.S. Supreme Court held investors’ attention after the Court ruled against the country’s appeal in the holdouts case. Argentina missed a payment on its restructured bonds on 30 June, but Argentina cold avoid its second technical default in 13 years if it reaches a deal with its holdout investors during a 30-day period that ends on 30 July. A negotiation deadlock, however, could force Argentina to enter into a default, which would put the country’s objective of returning to global capital markets in jeopardy (see details on page 78). Against a background of dismal economic growth and the potential for a politically and economically costly default, LatinFocus panelists expect the Argentinean economy to contract 0.7% this year, which is down 0.1 percentage points from last month’s forecast. For 2015, forecasters see the economy growing 1.3%.
  
Inflation expectations in the region increased in July following last month’s stabilization. LatinFocus panelists raised their inflation forecasts by 0.5 percentage points over the previous month and now expect the regional average to close 2014 at 12.0%. Analysts also raised their 2015 inflation projections from June's 9.3% to 9.7%.
 
The region’s central banks continued facing varied challenges last month. Across the region, three different forces are shaping their actions: rising inflation expectations, faltering economic growth and a combination of benign inflation and weak economic activity. Inflation expectations rose in Colombia prompting the Central Bank to raise its key monetary policy rate by 25 basis points to 4.00%. Recent data in Peru suggest a sharp slowdown in economic activity, which influenced the Central Bank’s decision to cut interest rates from 4.00% to 3.75%. In Brazil, where inflation is high and economic activity is notably weak, the Central Bank decided to leave the SELIC rate unchanged after having increased it in the previous month. In Chile and Mexico, where growth is subdued, but inflation is benign, the central banks decided to stay put in order to support economic growth. 

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